Today we’re launching new research of financial services that build on findings from our global cross-industry study, Why partnering strategies matter, released in May of this year. Here, I'll explore how the financial services industry compares to our global study - where they outperform, and where they have an opportunity to improve performance.

What did we find?

The financial services sector has faced a number of challenges in recent years. A global economic crisis slowed growth and put pressure on these enterprises to creatively cut costs while also facing increased governmental compliance and regulatory requirements. Client expectations and sophistication also rose. Similar to respondents in our global study, leading financial firms began a shift in sourcing motivations and execution.

As reported in our cross-industry study, leaders that source broadly and for innovation do better financially, reporting 2x revenue growth and 5x gross profit growth compared to their peers. Financial services respondents are no different. What is different for financial services companies is increased attention on agility achieved through new business and operating models, and responding better by anticipating market shifts.

Does the financial services industry partner differently?

First, we looked at how financial services compare to global respondents across four partnering strategies. When we look at extent of outsourcing and primary sourcing motivation, we find a higher percent of Enterprise Innovators and Enterprise Optimizers in financial services. What does this mean? Respondents in financial services are at the forefront of this shift in sourcing strategy - sourcing more broadly across the organization compared to their industry peers.

Are business priorities and partner capabilities different?

Enterprise Innovators in the financial services sector are similar to leaders in other industries - putting an emphasis on agility and responsiveness to achieve desired business results. However, financial services leaders differ in three areas: their focus on enabling new business models to outperform, anticipating market shifts, and creating a culture of innovation throughout the organization. Enterprise Innovators in financial services order these priorities more than 20 percent higher than their peers in other industries.

Can these leaders do more?

Financial services organizations can do more to improve the connection between shifting sourcing motivations and execution. Enterprise Innovators in financial services are aligning their services with business outcomes, but are less likely to tie metrics to business outcomes. They are on par in transforming their scope to include a broad range of delivery models, include partners in strategy, and vertically integrate contracts across infrastructure, business processes, and applications. However, when it comes to skills, they are less likely to make the required role changes to current personnel. Finally, they are moving toward integrating governance across service providers, but can improve by implementing enterprise-wide governance.

To see our full study - ’Partnering for innovation in financial services’ and to access the global cross-industry study, visit our page.

Not many people empathize with financial markets firms these days. Yet, they are facing a one-two punch of increasingly onerous regulation combined with increased competition (a result of more demanding customers, technological change, globalization and the downturn in the global economy).

Industry experts estimate that 15-20% of the market share for wholesale and investment banking will be reshuffled in the next few years. To survive let alone thrive, financial markets firms must adapt – by changing the way that they operate.

Working with Broadridge Financial Solutions we looked into how financial markets firms are responding to this demanding environment – and specifically the changes they are making to their operating models – that is how they organize their resources, business processes, systems, information assets, etc.

The research highlighted a leading group – who excelled at both compliance and innovation. This group had five key things they were thinking and doing differently than the rest:

Thinking marketplace first, “factory” efficiencies second

Designing operations around client interactions, not vice versa

Cultivating agility – and an ability to see what others don’t

Building and use scale, but not always in expected ways

Partnering to extend their capabilities – and their thinking

These firms have a different perspective on operations and how it contributes to the business. The distinctions between front, middle and back office are becoming less distinct. As a UK-based Chief Operations Officer at a Universal Bank observed: “We must make sure changes enhance the whole process - It’s no good having a Rolls-Royce in the front and a Mini in the back.”

The leaders are looking at how operations can positively contribute to the business – through consolidation and greater efficiency of course, but also through creating the flexibility to scale resources and adapt to market conditions, facilitating faster product development and enabling innovation.

The leaders are also more open to working with external partners – and see the positive value to be gained through collaboration, for example accessing the technology and resources of an external partner. Leaders outsource more of their business processes, in particular, traditional areas like back-office accounting, settlement and clearance and reporting systems.

Success in these areas will likely encourage leaders to forge ahead into sourcing more complex functions such as reconciliations, data management, tax reporting and corporate actions. But what they outsource is perhaps of less interest than how they outsource. The leaders outsource with a business objective in mind, seeking to get the best from their partner, whereas those lagging tend to see the potential benefits in a more limited way – focusing on cutting costs of the back office.

And importantly, the study points to these differences in attitude feeding into improved results. Those who recognize how operations can contribute to the business and see collaboration as a way of improving business outcomes are rewarded with improved customer satisfaction, faster product introduction, improved regulatory compliance and improved access to information.

So what are the implications, for firms operating in financial markets as well as those in other industries who are trying to optimize the contribution of their back offices? For financial markets firms - focus on achieving agility, scalability and customer centricity, with the potential help of external partners. Many of those currently lagging are planning to evolve their operating model over the next three years. However, there is no time to delay, as the leading firms are forging ahead, and gaining market share as a result.

For those in other industries seeking to optimize their back office operations, this study also provides valuable insights. The financial markets industry is an extreme case where technological change, globalization, market turmoil, low switching costs and significant regulatory change have come together accelerating required operating model change. But the drivers are similar in many other industries – and we are observing a transformation in approaches to outsourcing – focusing more on sharing expertise and delivering business value rather than simply efficiency savings. Increasingly, the winners, across all industries, will be those who exploit these new capabilities to the full.

If you look at the distribution matrix below, the first think you’ll notice is that 46% of the respondents
were identified as “Outperformers”.This
was the highest ratio of Outperformers of any of industry we
surveyed.Simultaneously, 33% of
respondents were identified as having low Listen and Anticipate capabilities.

What we’re seeing here is an interesting dichotomy.Simultaneously, a significant proportion of
the industry are Outperformers while a smaller yet significant proportion of
the industry has low Listen and Anticipate capabilities – without much in between. This tells us that while Banking is clearly one of the more advanced industries when it comes to data and analytics, there are still significant opportunities for improvement.

As you might expect, the Banking industry Outperformers capture quite a
bit of data.79% captured customer data at every interaction (2.1x more than the Others).Additionally 58% of the Outperformers
captured unstructured data (1.6x more than the Others).

What is that data used for?Interestingly, both Outperformers and Others
used analytics to guide the actions executive decision makers (83% and 79%
respectively).This was by far the
smallest gap in this capability between the Outperformers and Others of any
industry and suggests that this capability is “table stakes”.

However, there are several uses of data that differentiate
Outperformers from Others.First, 84% of
Outperformers provide insights to suppliers and business partners (2.4x more
than the Others).Second, the Banking
Outperformers tied for the highest percentage usage of analytics
to recommend actions to customers among the industries (87% - 1.7x more than the Others).

Finally, we saw 2 very interesting results when we asked
where Banks realized value from analytics.We found that 37% of Outperformers realized value when they used
analytics to drive workforce planning and management.This was particularly interesting because the
Outperformers were 9(!) times more likely to realize value here than the
Others.

The other interesting result was one that we haven’t found
a complete explanation for (yet!).65% of the Others vs 48% of the Outperformers realized value from analytics in regards to
risk management.This was a
counter-intuitive result, so there’s clearly something interesting going on
here.

My current theory is that this result doesn’t mean that
these Outperformers aren’t engaged in risk management activities.To the contrary, it likely means that about half of them have
other systems in place that drive their risk management activities without relying significantly on Analytics.They
may make more use of policies, procedures, limits, and executive
oversight. Or perhaps their greater use of analytics to
engage with customers, suppliers, and business partners is effectively
providing indirect risk management.

Hopefully this has provided you with some interesting
insights into the Banking industry.As
always, please feel free to leave a comment or
send me an e-mail if you have
any questions.I’d be particularly
interested in any thoughts you might have on risk management in the Banking
industry.